What are my options?
Buying a Home in Calgary, Alberta without a minimum of 20% down payment, requires a CMHC (Canadian Mortgage and Housing Corporation) mortgage. This holds true anywhere in Canada.
There are certain rules when dealing with the down payment. Our Federal Government has developed a program for Canadians to own homes without going to a conventional mortgage. A conventional mortgage requires a minimum of 20% down. That 20% gives the lender confidence because real estate shouldn’t go down 20% so the security on the loan is pretty safe.
The CMHC mortgage or government insured mortgage (high ratio mortgage) allows Canadians to put down up to 20 percent. You can go as low as 5% down through a CMHC insured mortgage.
Now, there is a cost to this insurance. You can buy a $300,000 house with 5% down ($15,000), but the government, in turn, insures to the lender that if there is a default by the buyer, they’re going to get their money back.
There is a premium that goes with this. It’s like any other insurance when you’re borrowing with 5% down; it’s 4% of the mortgage amount. On a $300,000 mortgage, that comes to roughly $12,000. This isn’t anything to panic about because it isn’t considered a closing cost or money you have to come up with. That insurance premium is added to the mortgage.
So, 5% down is the minimum. If you put 5% down, it’s 4% of the premium. The premium percentage goes down as you move up to 20% with your down payment. Anything above 20% down is considered a conventional mortgage and there is no premium after that.
When 0% Down is Possible
If somebody has impeccable credit and good income but they’re just the type of people that cannot save the down payment at all, there are products out there where the lenders will actually allow you to buy a home with 0% down.
For this to happen, your credit rating has to be golden because whether we like it or not, it doesn’t matter if Sister Teresa is going for a loan. The banks only look at your character based on what they see as your credit rating. Regardless of who you are, your character is judged based on your credit rating. Because of this, in order for a loan to be approved with 0% down, you have to be able to reflect to them that you have impeccable credit and a good income.
If You Don’t Have the 5% for a Down Payment
There are places to draw money from if you’re dealing with 5% down. The lenders have programs where you can make up that 5% through an RRSP Contribution and you can move that over.
And recently, changes have been made so you can have a gift letter from parents that says, “We’re going to gift the money and this is where it’s coming from.” This has to be done because you have to prove where your 5% down is coming from.
Then on top of the 5% down on a CMHC mortgage, you have to have at least 1.5% in a bank account to cover the closing cost which we discussed in our blog post How Much are Closing Costs for a House in Calgary? This covers the legal fees, the tax adjustments and so on. That’s money you have to come up with over and above the 5%.
For more information, you can check out our mortgage calculator HERE